BEING STREET SMART
by Sy Harding
WHY WALL STREET CANNOT SAY SELL! October 31, 2008.
Why do Wall Street firms advise public investors to buy and hold, when that is not how they manage their own money, and when investors who do so almost always wind up losing money over the long-term?
The pressures on Wall Street to give that kind of advice are clear and understandable.
For instance, statistics show that mutual fund managers have an average annual portfolio turnover rate of more than 100%. That means that their own average holding period is less than 12 months, in bull or bear markets.
Yet they tell their investors the market cannot be timed, that they need to simply buy and hold through whatever comes along, ‘let time take care of it’, ‘have a long-term outlook’, and all the other slogans that repeatedly get investors portfolios in trouble.
Why? Because their income and profits depend not on how much or how little they make for their investors, but on the total of investor assets they have under management, on which they collect their management fees (even when their investors are experiencing losses). Therefore, for the sake of their businesses they must do whatever they can to talk investors out of taking their money away for even a few months at a time.
Why do brokerage firms advise investors to buy even as prices plunge 30%, 40%, or more? It’s not as they say, that no one can time the market. They don’t know when a bear market is underway, and that it will pull 90% of stocks, even the best stocks, down with it? Even cab-drivers and window-washers know early on when a bear market is underway. But what would happen to the firm’s commission income if every few years brokerage firms told investors to move to cash and stay out of the market for six months to a year when a bear market hits? What would happen to their relationships with corporations on which they depend for investment banking business if they told investors to sell the stock of those corporations?
Why do CEO’s of publicly traded companies visit financial TV shows to tout their stocks and advise investors to buy and hold, that the market cannot be timed? After all, corporate insiders have well-documented histories of selling their stocks near tops, and buying them back after they’ve tumbled. Their success in market-timing is so consistent that institutions and serious investors use information on which companies have heavy insider buying or selling as a tool in their own investment decisions.
But obviously corporate managers don’t want investors bailing out of their stock, driving the price down further, when their bonuses may be tied to the stock price, or they may need as high a stock price as possible in order to get good deals in the merger and acquisition opportunities that become available in bear markets.
Why do money-management firms mostly stay fully invested, and instead put their efforts into assuring their clients that all will be fine if they only have patience, that the market always comes back?
For some it is because they have become so large, managing hundreds of millions, even several billions of client assets that they simply cannot move in and out of the market. So they have to explain to their clients why they are remaining fully invested even while losses pile up.
For others it is that clients tend to go away if a manager puts them substantially in cash for very long, assuming there must be somewhere that they could be making profits. That in spite of the history of numerous periods when cash has been the most profitable place a client’s assets could be.
Perhaps money-managers should make sure their clients are aware of the old story about the client who told his money-manager, “I don’t like paying you a fee to put me in cash.” To which the money-manager replied, “You’re not. You’re paying me to know when to put you in cash.”
In any event, it all comes down to the fact that over at least the last hundred years a bear market has come along on average of every four years. Wall Street and corporate insiders know better than anyone when they have begun. They know the market can be timed, because they do so with their own money.
In fact after market declines they are very persistent in advising investors that “it’s time to get back in”, which implies there was a time to get out. But investors didn’t hear that part of it, at least didn’t hear it from Wall Street.
But then, it would not be good for their businesses to tell investors when to sell, when to stand aside in cash, when to sell short to make gains from the downside.
Investors need to realize that when to sell is a decision they must learn to make without Wall Street’s help, if they are going to make gains in bull markets and not give them back in the subsequent, and inevitable, bear markets.